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Forex Fraud

It’s an old story. A new market or investment opportunity opens up. A few people make excellent returns in a short amount of time and advertise the investment to their friends. Soon there is a rush of inexperienced, unsophisticated investors, hoping to make big money without any risk and little knowledge. This only attracts an equal number of frauds and scammers who are more than happy to help people part with their money. In the end, a large crowd of frustrated people exit, vowing never to invest again.

However, fraud has also plagued the market during the same period. In 2008, the CFTC, the U.S. commission responsible for monitoring the market, set up a special task force to focus on forex fraud. They found that many dealers promised large returns with an initial investment of $5,000. In a number of cases, the money never even entered the market, but was simply stolen. In other cases, the fraud is more sophisticated, as “trading desks” charge expensive fees or purposefully insure that their customers lose—to the benefit of the brokerage. According to the Wall Street Journal, the average trader loses about $15,000, and one CEO of a forex company said, “If 15% of day traders are profitable, I’d be surprised."

Consider one example of a forex scam. In 1998, Russell Cline founded Orion international—a brokerage specializing in forex trading. They claimed to have sophisticated trading techniques with returns of 60% to 200% and minimal risk. But the brokerage was a complete fraud. After four years, Cline admitted to his clients that 97% of the $27 million that had been invested was gone. He blamed unlucky trading and minor errors for the loss, but in reality, the money was spent on personal jets, luxury cars, real estate purchases, boats, and another $12,000 on pornography. Cline was sentenced to only 8 years in prison, and investors received a tiny amount of their money back.

This pattern may have been repeated many times in the past, but that didn’t stop many people from falling into the same trap when online forex investing became widely available in the late 90’s. The retail forex market has grown explosively, as trading platforms have made the market increasingly accessible to consumers.

Russel Cline illustrates a principle that applies to all forex, as well as other kinds of investments. If an opportunity sounds too good to be true, it probably is. Forex trading is a sophisticated and challenging type of investment, and traders can only profit if they are smarter than the rest of the market.

Another principle illustrated by this example, is that just because a company is under official regulatory agencies, it isn’t guaranteed to be safe or even legitimate. Every trader who considers entering the market should remember that his account is not insured under any government agency, and if the brokerage or investment fund proves to be a fraud, the money is simply gone.

How then, do you recognize a fraud before losing? First, notice the history of the company. Most frauds have been launched in the past few years, but a company with longevity has a better chance of being legitimate. Also, pay attention to how your brokerage or fund actually works and makes money. If it doesn’t make sense, you should be asking hard questions. Most importantly, never believe promises that are unrealistically good. If a brokerage can deliver astronomical returns, why do they need your money? In all, good thinking and hard questions at the beginning can save you a lot of money in the end. Be wise.

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